Health Check: How Prudently Does Berjaya Corporation Berhad (KLSE:BJCORP) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Berjaya Corporation Berhad (KLSE:BJCORP) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Berjaya Corporation Berhad

What Is Berjaya Corporation Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Berjaya Corporation Berhad had debt of RM5.09b at the end of March 2021, a reduction from RM5.32b over a year. On the flip side, it has RM1.37b in cash leading to net debt of about RM3.72b.

How Strong Is Berjaya Corporation Berhad's Balance Sheet?

According to the last reported balance sheet, Berjaya Corporation Berhad had liabilities of RM4.96b due within 12 months, and liabilities of RM6.52b due beyond 12 months. Offsetting these obligations, it had cash of RM1.37b as well as receivables valued at RM2.30b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM7.81b.

This deficit casts a shadow over the RM1.41b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Berjaya Corporation Berhad would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Berjaya Corporation Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Berjaya Corporation Berhad made a loss at the EBIT level, and saw its revenue drop to RM6.6b, which is a fall of 11%. We would much prefer see growth.

Caveat Emptor

Not only did Berjaya Corporation Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping RM169m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost RM533m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Berjaya Corporation Berhad is showing 3 warning signs in our investment analysis , and 2 of those don't sit too well with us...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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